Investors take confidence into 2007

Retail Investors have generally had a profitable year, with most major markets finishing up in positive territory. And investor confidence remains high for the coming 12 months.

As we approach the end of the year, it is only natural to look back at what has been happening and try to draw some conclusions from the outcome. For most investors, 2006 has proved a profitable time to be in the market. Indeed, given the unsettled period that was ushered in last spring, there must be more than a little relief around as we look like finishing the fourth year in a row in positive territory – for most markets, that is.

This generally benign experience is exemplified in the surveys published recently as investment organisations endeavour to gauge the appetite for buying products in the year ahead. By and large the retail investor appears to be viewing the future with confidence. Expectations are for the FTSE 100 index to move into new high ground next year. With just three weeks to go before we draw stumps on the current year, we still remain about 12% short of the peak achieved on the last business day of 1999.

In fact the Footsie has notched up a gain of only about 8% as we enter the home straight – welcome, certainly, but hardly the stuff from which fortunes are made. America has done a little better, with the S&P 500 rising by nearly 13%, although this positive performance will have been less profitable for overseas investors, given the recent slide in the value of the dollar.

Among the major markets, the developed eurozone countries have rewarded investors handsomely. Germany, as measured by the Dax index, is up by more than 16%, with the currency holding its own in world trade, while France’s Cac 40 index is more than 12% higher so far this year. But these pale into insignificance when compared with East Asia. The Hang Seng index is up by more than a quarter, demonstrating how strongly Chinese businesses are moving into centre stage as the world’s most populous nation continues its breakneck economic expansion.

But it is in East Asia that we can also see the more mixed picture emerging from a year that has proved testing for many investors. Japan was up by just 2% at the beginning of December, according to the Nikkei 225 average. The Japanese market was, of course, leading the field at the end of 2005, but when the shakeout in markets commenced as the tricky month of May got under way, it was the major market that took the biggest hit.

If you want evidence of how difficult the situation became, look no further than the broad statistics showing how the total universe of funds behaved in this country. Not only are all the bottom-five performers invested in Japan but the whole bottom 10 are too. And there are some big names among those that lost their investors money in what was otherwise a positive year for investment returns.

Fidelity, M&G, Threadneedle, JP Morgan, Schroder and Invesco Perpetual are all huddled together at the bottom of the tables. The worst-performing fund – Legg Mason’s Japan Equity – lost nearly half its value. True, smaller-company and special situation mandates are in a majority among the losers, but anyone who believed the corner had truly been turned for Japanese investors was given a rude awakening this year.

Some of the emerging markets were even more troublesome. While many recovered as the summer got under way, a number of the smaller, less-liquid markets have remained volatile. There has been much for investors to take into account in various areas around the globe. The continuing uncertainty in the Middle East, the military coup in Thailand and growing signs of an economic slowdown in America – with all the implications this might have for those countries dependent upon the propensity of the American consumer to spend – have all combined to reinforce the difficulties of making money out of lesser-developed countries.

It is, though, two of the emerging giants that have delivered the greatest returns so far this year. Russia and China have afforded tremendous opportunities, despite the not-inconsiderable pitfalls of investing directly in these countries. Neptune, in topping the charts for the first 11 months of this year in both these regions, has demonstrated remarkable consistency. Russia, of course, continues to benefit from the growing demand for oil and gas, even if prices have tended to moderate recently. These are, though, higher-risk funds, and ones for which fortunes could swiftly be reversed if sentiment changes.

Interestingly, smaller-company funds have performed well this year, despite almost universal caution being expressed over their ability to maintain the momentum generated over recent years. Insight’s European Small Cap vehicle is just a few places behind the Threadneedle Pan European Smaller Companies fund, ranked number four so far this year, while the Standard Life UK Smaller Companies fund lies just outside the top five, with a rise in value of nearly 33% during the past 11 months.

Property, too, makes a strong showing – just as well, given the appetite domestic investors appear to have for bricks and mortar. Swip’s European Real Estate fund lies in fifth position, while property funds offered by both Aberdeen and Skandia, in the latter case managed by La Salle, are also in the top 10, recording rises either side of 32%. Only one resource fund makes it into the top 10, though. The Nucleus Gold and General fund comes in at number six, a whisker behind Swip’s real estate offering.

So much for the past, what of the future? Experience tells us that this year’s winners are unlikely to be leading the pack in 2007. Japan may have served us well last year, but it has proved a dog so far in 2006. The real risks remain the extent of the American slowdown and the geopolitical dimension, which investors appear happy to ignore for the present. Next year could be a period when a safety-first policy pays dividends – but we will have to wait to find out for certain.